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2
1.
The
Business
Models
of
the
Traditional
TV
Industry
The US television industry can be broken down into three segments, broadcast
television, cable/satellite television1, and public television. Since the case primarily
focused on cable and broadcast television, primary focus will be placed upon these
two segments.
These networks have their own studios to create content which viewers watch. This
content can range from situation comedies to live shows. In addition, the networks
sometime purchase content made elsewhere. It is not uncommon for a network to
show syndicated programming which was initially created by another network. Other
times content is purchased from movie studios. It is important to note that “content is
king”. These networks must ensure that they offer their viewers the best possible
content at the lowest prices. Without viewership, these networks’ revenue streams will
quickly diminish.
Since the networks freely distribute their content, it is free to view on any television
with an antenna. Since the companies do not charge viewers, they must find
alternative ways to make revenue. Therefore, their revenue streams come from
advertising. According to a 2001 survey, broadcast television networks transmit 16 to
21 minutes of commercials an hour2. Essentially, up to a third of what is broadcast are
commercials. The amount that networks receive for these commercials varies
drastically. A commercial that is shown during “prime time”, the most-watched three
hours of television, will have a much larger viewing audience than one shown at 4
AM when most people are asleep. Therefore, networks receive much more money for
“primetime” commercials than other ones. However, it does not stop there. Certain
programs are more popular than others and therefore capture a larger viewing
audience. These programs clearly earn more advertising revenue. In other words, the
networks that are most profitable are those that gain the most advertising revenue.
The more viewers that watch a show, the more advertisers are willing to pay.
Therefore it is critical that networks offer great content to attract a large viewer base.
1
Americans generally known use the word “cable” television indiscriminately when referring to either
cable or satellite television. To avoid confusion, this paper will refer to both cable and satellite
television as “cable” television. However, this word is intended to cover both categories of
subscription television.
2
http://en.wikipedia.org/wiki/Television_in_the_United_States, date accessed 29-jun-10
3
1.2 Cable/Satellite Television
Cable television is private television that people must subscribe to use. It is either is
provided through a cable or via satellite. When viewers subscribe to cable television
they agree to pay for a bundle of channels. This bundle may include basic channels as
well as premium ones. Cable operators provide a limited number of packages from
which a user may select. In many instances subscribers are “forced” to pay for cable
packages that include many unwanted channels.
There are generally only a few cable operators in any region. Thus, viewers have
limited options from which they can choose. Cable operators strictly provide cable
channels. They do not create content of their own. In some ways, they can be viewed
as the “dumb pipes” of the cable television industry. They link the cable channels to
the end users. These operators pay for each channel that they provide to viewers.
Viewers then pay for the entire subscription service.
It is important to note that there are two kinds of cable channels that viewers watch.
They are the following:
• Premium channels: These channels are said to offer “premium” content. This
content ranges from recent Hollywood movies to content produced in their
own studios. These channels do not earn revenue from advertising. Instead,
they charge viewers a premium for their content.
3
http://en.wikipedia.org/wiki/Cable_television_in_the_United_States, date accessed 28-jun-10
4
http://www.nypost.com/p/news/business/cbs_cable_cabal_MFkrDUA1hKAFJDe0YJPiYN, date
accessed 1-jul-10
4
Figure 1: Traditional value chain of TV industry
When examining the two segments, the cable channels tend to fare better regarding
profits. While it is true that overall cable channels receive more money than
broadcast networks, they always receive a fixed subscription fee from their viewers.
This subscription fee makes all the difference in terms of revenue. FOX, for example,
operates both broadcast network as well as a cable channel. For the quarter ending in
September 2009, its broadcast network had a 54% drop in operating income. During
that same period its cable network increased by 41%5.
It seems clear that cable channels are more profitable than broadcast networks. In
fact, CBS’s CEO Les Moonves was quoted saying that moving to cable would be “a
very interesting proposition.”6 However, switching from being a network operator to
a cable channel is quite challenging. The networks have owned and operated stations
that they maintain. ABC and NBC each have 10 while CBS owns 14. Determining
what to do with these stations could be quite costly. In addition, the networks must
think about their advertising revenue. It is estimated that 15% of US households do
not have cable or satellite. This means that if the networks all switched to cable they
would lose that viewership which would cause a drop in advertising revenue.
While the broadcast networks accept their current position, it is also clear that they
must begin searching for alternative revenue streams. One area where they have set
their target is cable operators. In the past the FCC required that cable operators
provide network channels as a part of their basic channel offering. In return, the
networks would not demand a fee for those retransmission services. Recently, the
broadcast networks have decided to start altering the rules of the game. They have
begun demanding retransmission fees from the cable companies. Cable companies, of
course, have the option of not showing those channels, but taking such an action could
5
http://filmtvindustry.suite101.com/article.cfm/tv_business_model_explained, date accessed 28-jun-10
6
http://www.businessweek.com/magazine/content/09_22/b4133076651151.htm, date accessed 29-jun-
10
5
cause a lot of unhappy customers. Although it is not clear how far the networks will
go, they have been quite successful up until this point. CBS now boasts
retransmission fees of fifty cents per subscriber per month and FOX is earning even
more, somewhere around sixty cents7.
It is almost a certainty that the networks will continue to grab as many transmission
fees as possible. As the transmission fee battle continues, cable operators will search
for ways to either cut costs or increase revenues in order to survive. The cable
operators are faced with two tough choices. The first option is to increase
subscription fees in order to make up for the increase in transmission fees that they
must pay. If this happens, it is likely that some viewers will cancel their
subscriptions.
The other option that cable operators have is to renegotiate the fees that are paid to the
different cable channels. Cable channels like ESPN have little to worry about. First
of all, they make a large amount of money per user. So, even if revenue dropped a
bit, they would survive. However, the big name channels are unlikely to be impacted
by this. People subscribe for these channels in particular. Since these channels know
that they have a large amount of bargaining power, they are unlikely to accept a per
subscriber fee cut. Small cable channels that do not have a large viewership, on the
other hand, have very little bargaining power. In addition, these companies make just
a couple of cents per subscriber per month. They have no negotiating power and no
revenue. Big networks’ demand for retransmission fees is likely to force cable
operators to cut the small cable channels from their package. The result will be that
only the most popular, most mainstream channels will survive. The cable channels
that offer unique and creative content will die unless they find an alternative way to
transmit their content.
7
http://filmtvindustry.suite101.com/article.cfm/tv_retransmission_cable_subscribers_to_pay_more,
date accessed 29-jun-10
6
Figure 2: Online video value chain
2.1 Hulu
Hulu’s revenue model is quite clear. Its revenue stream is based on advertising. In
fact, Hulu’s advertising scheme is quite innovative. It ranges from the basic fifteen to
thirty-second advertising break all the way to the user-controlled experience wherein
the user could select the type of promotion he/she viewed from the advertiser. In
addition, since Hulu captured a great deal of user information, it allowed advertisers
to really target their customers. They could “target specific genres, demographic
groups, geographies, day-parts or behavior.” By providing creative and targeted
advertising schemes, Hulu was estimated to receive an average CPM rate between
forty and fifty dollars. This was much higher than the twenty to forty dollars that
networks received for primetime advertising or the fifteen to twenty-five dollars that
cable operators received for original dramatic content. Hulu clearly has a successful
revenue model.
The exact type of content that Hulu offers is somewhat of a potpourri. It generally
provides content that is shown on those networks that co-own the company, ABC,
NBC, and FOX. A hard and fast rule is that if a program is currently shown on one of
those networks, it will likely be shown on Hulu within a day or week’s time. In
addition, Hulu seems to offer older shows from those networks, sometime entire
seasons, in fact. However, this seems to vary from show to show. Also, some
providers like PBS and Comedy Central share their content as well. In order to
improve its site Hulu should try to create a set of standards so that users always know
what they expect to see for each show.
7
However, in order to create standardized content, Hulu must come to agreements with
providers. Unfortunately, it does not seem clear that all content providers know
exactly how to handle Hulu. While some are more than willing to share every episode
of certain shows others are hesitant to do so because they fear that DVD sales will
drop and/or rankings of that show may be affected. In order for Hulu to obtain
content from these providers it must address two critical issues.
DVD Sales: Hulu must find a way to ensure that DVD sales for certain shows
do not drop if their content is placed on Hulu. Or, if sales do drop, Hulu must
find a way to monetize the high-value content that is now being offered on its
site.
Once Hulu addresses the aforementioned issues, it will be able to better attract content
providers. In doing so, it will attract users and then advertisers making the company’s
profits grow.
2.2 TV Everywhere
Based on the initial trial study it appears that users had countless problems with the
authentication tools allowing them access to TV Everywhere’s site. Even if these
problems are resolved, TV Everywhere has bigger problems to resolve, content.
Although the site offers some content, it offers very little from recent shows. One
critic laments
“[O]ther series, such as Six Feet Under or Deadwood, are notably missing.
Perhaps more importantly, shows that are currently still on the air — like
8
http://news.cnet.com/8301-1023_3-10271895-93.html?tag=mncol;txt, date accessed 30-jun-10
8
True Blood — have very few, if any, episodes available for viewing. And those
that are available are from early seasons, which means subscribers won’t be
able to catch up to what’s happening currently.
A glance at some other content partners paints a pretty similar picture: AMC
has the complete miniseries The Prisoner available, but no Mad Men;
Discovery has no full episodes of Mythbusters; and Bravo only has two recent
episodes of Top Chef online.9
All of the programs that are in bold are shows that the critic states are missing or
lacking from TV Everywhere’s website. It is no coincidence that ALL of those
programs can be purchased in DVD format. If content providers allow TV
Everywhere to show episodes from past years, it would be directly competing with
their own DVD sales. Essentially TV Everywhere would cannibalize any revenue that
might be generated through DVD sales.
Hulu’s business model is very similar to that of network television; it shows current
shows or often-syndicated shows. This is content that users could generally acquire
free of charge. TV Everywhere’s business model is different. The idea is to offer
select content to subscribers who are already using this service. However, this “free”
service not only competes with DVD sales, it also provides no incentive for premium
cable channels to provide their content. A user that pays an additional fee for a
premium channel expects high quality content with no commercials. If premium
channels are offered on TV Everywhere’s site, one of two things will occur. They
will be shown with commercial advertising, thus making them appears less
“exclusive” and “premium” and possibly hurting the brand name. The second option
is to offer the premium content with no commercial advertising. In this case, the
brand is not damaged, but the content is not being monetized. The only thing it may
be doing is offering more opportunities for the content to be illegally pirated.
3.
Porter
five
force
analysis
of
Online
Video
distribution
industry
Bargaining power of Suppliers – (Strength of Force—High)
The term “suppliers” comprises all sources for inputs that are needed in order to
provide goods or services. Hulu’s suppliers are content providers such as NBC, ABC,
FOX.
9
http://newteevee.com/2009/12/29/hands-on-with-comcasts-xfinity-tv-everywhere-thats-not-all-its-
cracked-up-to-be/, date accessed 1-jul-10
9
1. Suppliers do not face significant switching costs from moving from one online
distributor to another.
2. Suppliers have the content ownership and they decide who should get their
content.
1. Hulu provide the viewer with a large library of famous series from different
networks. There are not many websites that offer such a vast variety of free
content to viewers. Hulu gives the viewers an option to watch videos online
anytime and anyplace.
10
This force describes the intensity of competition between existing players
(companies) in an industry. High competition results in pressure on prices, margins,
and hence, on profitability for every single company in the industry.
1. There are few players in the online video distribution industry. Most of the
players don’t have the size and scale of content that Hulu has.
2. However, the potential market size of online video distribution is huge. In near
term there is plenty of space for different players to grow.
3. Online distributors also have a few business models through which they can
monetize the content which means less of a battle for revenue.
5.
Directions
for
Hulu
Hulu must address its present situation in the market and find ways to improve its
current position. Upon doing so, it should consider the different threats and
opportunities in the dynamic and growing online video market. Given the limited
marketing dollars and human resources that Hulu has, it should then consider
venturing into new opportunities.
11
5.1 Current Situation
While Hulu has been successful thus far as being a content aggregator, there are two
major issues that the company must resolve in order to win over many content
providers. They are the following:
DVD Sales: Content providers look for every opportunity to earn revenue for their
works. More and more often, old seasons of successful shows are being made into
DVD sets in order that viewers can purchase the content. If Hulu begins offering the
same content on its website, it is likely that DVD sales will drop. Therefore, Hulu
must ensure that content providers are compensated adequately for this online
programming.
It is difficult to find any information regarding the actual production and distribution
costs of making a season of a TV series into a DVD set. Recently, Apple has started
negotiating its selling price of episodes with content providers. While Apple believes
that individual episodes of a program should be sold for 99 cents, content providers
strongly believe $1.99 is a fairer price10. Using this information, one can determine
whether or not Hulu can offer a revenue model that content providers accept.
Based on the case, average CPMs at Hulu are $40 to $50. In other words, the
company earns $40 to $50 dollars per thousand individuals that viewed its advertising.
That equates to be 4 to 5 cents per individual. While traditional TV broadcasts 16
minutes of advertisements for every hour of programming, the case stated that Hulu
broadcasts 25% of that and may possibly grow to 50% in the future. This means that
Hulu currently offers 4 minutes of advertising for every hour of programming.
Advertising comes as either 15 second segments or 30 second segments. No
information could be provided regarding the average segment length, so it is assumed
that the average segment length is the average of the two, or 22.5 seconds. In
addition, 70% of the revenue earned from advertising goes to content providers11.
Doing a few simple calculations, one obtains the following information:
Now, Hulu predicts that it will eventually offer 8 minutes of advertising per one hour
of programming. Even with this increase in advertising, the revenue returned to
content providers would be the following:
10
http://www.nytimes.com/2010/02/22/business/media/22itunes.html?_r=1, date accessed 1-jul-10
11
Oruganti, Rama. Hulu, to be or not to be. Vincent L. LaCorte Case Series, Tuck School of Business
at Dartmouth, 2009.
12
These calculations explain a lot about Hulu’s revenue model. Hulu’s average CPM is
much higher than that of traditional network television, and therefore most networks
are comfortable providing their current content to Hulu. However, if Hulu expects to
attract the providers that are currently selling their content on DVDs (or willing to sell
it for $1.99 on iTunes), Hulu will have to find other revenue models in order to
compensate them.
It appears that Hulu has done just that. Just recently, the company has begun offering
subscription services which allow users to “watch every episode aired from the
current season of top shows from ABC, NBC and FOX.”12 In addition, the site
provides many episodes from past shows as well. Time will tell whether this stream
brings in enough revenue to keep the premium content providers happy. If these
subscriptions provide an additional $1.65 per user per hour of premium content, all
will be good.
The plan just may work. The average Hulu user is currently estimated to watch 2.1
hours of video a month13. However, content providers are probably not making a
direct comparison between Hulu and DVD and iTune sales. There is one critical
difference that remains. While users purchase a DVD or an episode from iTunes,
Hulu viewers do not. They simple watch the show using Flash. As soon as the
program finishes, the content is gone. This keeps the content with the content
providers. They continue to hold the power and can offer their content when they see
fit. Piracy is a constant concern for content providers. The fact that their content is
streaming to the users versus owned by them, keeps the power with the providers.
This factor is very important and will likely what convinces premium content
providers to allow their programs to be shown on Hulu.
12
http://www.hulu.com/plus, date accessed, 1-jul-10.
13
http://www.comscore.com/Press_Events/Press_Releases/2010/1/November_Sees_Number_of_U.S._
Videos_Viewed_Online_Surpass_30_Billion_for_First_Time_on_Record, date accessed 1-jul-10
13
Nielsen can calculate aggregate ratings that include traditional and online media
sources, content providers will be much more willing to make the jump to Hulu.
Rental – Hulu can further supplement its revenues by offering video rental service. In
this business it would be competing against iTunes, Netflix and Google online video
rental services. Users can pay some amount to download the DRM protected content.
The content will be available on a user’s computer for a fixed number of viewings or
a fixed number of days before it becomes non-functional. In order to get the content
providers on board, Hulu should share revenue with them. The rental business model
can be applied to more premium content such as latest movies. However, the only
drawback with this business model is that it might not fit Hulu’s business strategy of
being a website that provides users with free entertainment that is supported by
advertisements. Instead Hulu will effectively loose interactivity component with its
online users.
Download – The third revenue model is the download where users pay a certain
amount to purchase and own the content. In this business, Hulu will be directly
competing against big giants such as iTunes, Wal-Mart, Amazon. The a-la-carte
download has proven very successful for users who do not want to buy an entire CD
when they are just interested in few songs. With this new business model Hulu can
capitalize on those users who are not interested in buying an entire series but
interested in a few select ones. In this approach, the user owns the content, so the
content download should be protected by DRM technology. Content providers would
be willing to share their content only if they felt comfortable that Hulu had
implemented necessary technology safeguards to protect the content from piracy.
Again, this business model does not fit Hulu’s strategy of being a website that provide
users with free entertainment that is supported by advertisements. In this model Hulu
will effectively lose interactivity component with their online users. Moreover,
downloading movies online may create channel conflict with existing offline retailers
such as Wal-Mart who would likely find a drop in DVD sales. Therefore content
providers may not be interested in creating any conflict with their sales partners.
14
Subscription – Hulu can start a subscription service where the subscriber pays a fixed
monthly fee to view the additional content on the website. It will be a new, ad-
supported subscription product that is incremental and complementary to the existing
Hulu service. Current ad supported service contains just the few trailing episodes of
current series and all episodes of the past series. With this new service, subscription
users will have full access to current and past series. Sharing subscription revenue
with content providers reduces their reluctance to share latest content on Hulu. In the
future, providers will be more willing to share the content with Hulu if they see the
monetizing potential. This revenue model appears to be most aligned with Hulu’s
current business strategy.
Add more content to the existing library - Hulu should try to acquire the content
from as many providers and networks as possible. As a media aggregator and
distributor, Hulu has to negotiate the content deals with each network separately. Hulu
still does not have CBS' content in its libraries. Moreover, premium content from
channels such as HBO, Cinemax is absent from Hulu’s libraries. Content availability
will be a main factor that will distinguish Hulu from other online video distributors
such as Joost.com, Netflix or iTunes.
Television networks are forcing cable operators to pay high retransmission fees. This
is causing cable operators to look for ways to save costs. The most effective way they
can do this is by removing channels that are in low demand and cater to very niche
audiences. This leave small cable channels with few opportunities to share their
content. Hulu can take advantage of this market dynamics. Small networks will likely
be more than willing to share their content if given a chance and niche subscribers
will be thrilled to find their unique content available at Hulu.
Move into social media space – Another option for Hulu is to forge stronger ties
with its online community of users. Currently users play a prominent role in shaping
the site. Users can express their views on content. They can also write a review for
and rate each clip. However, Hulu may want to consider moving beyond being a
video portal into social networking and create a unique relationship with the users. A
15
move by Hulu into social networking might solidify it as a go-to place for both user-
generated and professional content. A successful foray would help strengthen Hulu’s
independence and power. It could also help NBC, Fox, and ABC networks to gain
advantage over their rivals by learning more about their customer preferences. Hulu
could create new monetization options or get active user feedback that would enable it
to shape the programming that the media companies generate and distribute. This
would also help Hulu to increase its share of the value chain by limiting the power of
the cable and satellite companies. However, opening the door to user-generated
content might offend some advertisers who do not want their brands to be associated
with content that is not of professional quality. It might be a very difficult challenge
for Hulu is to convince advertisers and professional content providers to share the
platform with non-professional content providers. Therefore, this idea
7.
Conclusions
The main sources of revenue for the television industry are advertising and
subscription fees. TV industry concerns about losing control of the content through
online piracy and brand dilution of cable networks by video on demand services are
justifiable. However, the industry also acknowledges the online video trend and the
consumer demand for easy access to videos as unstoppable. Some consider it better to
strategically, and in a controlled manner, accept the changes in the industry.
16
explore new and realistic possibilities of monetizing their content. If not, they are
likely to be left behind as the online TV continues to grow.
17
8.
References
http://en.wikipedia.org/wiki/Television_in_the_United_States, date accessed 29-jun-
10
http://filmtvindustry.suite101.com/article.cfm/tv_business_model_explained date
accessed 28-jun-10
http://www.nypost.com/p/news/business/cbs_cable_cabal_MFkrDUA1hKAFJDe0YJ
PiYN, date accessed 1-jul-10
http://www.businessweek.com/magazine/content/09_22/b4133076651151.htm, date
accessed 29-jun-10
http://filmtvindustry.suite101.com/article.cfm/tv_retransmission_cable_subscribers_to
_pay_more, date accessed 29-jun-10
http://newteevee.com/2009/12/29/hands-on-with-comcasts-xfinity-tv-everywhere-
thats-not-all-its-cracked-up-to-be/, date accessed 1-jul-10
http://www.nytimes.com/2010/02/22/business/media/22itunes.html?_r=1, date
accessed 1-jul-10
Oruganti, Rama. Hulu, to be or not to be. Vincent L. LaCorte Case Series, Tuck
School of Business at Dartmouth, 2009.
http://www.comscore.com/Press_Events/Press_Releases/2010/1/November_Sees_Nu
mber_of_U.S._Videos_Viewed_Online_Surpass_30_Billion_for_First_Time_on_Rec
ord, date accessed 1-jul-10
18